Davis took a sip of sherry, and looked slightly giddy. "You'll forgive my enthusiasm, I trust. This is my subject and I am sometimes carried away by it."
"I am not surprised," replied Perry. "You have reason. I confess I don't see all those implications just yet, but it sounds amazing."
"You will see," returned Davis, "and by the very method we used. You can set up this game with the chessmen to cover every possible case. For example, throw in some professional men and observe that the cycle is unchanged. Provide a foreign trade with a balance in our favor and see how the cycle can be made to balance. Then a foreign trade in which goods are dumped on us and see how it dislocates our system. Then change the supply to balance it anyhow and observe how we can benefit. Play two tables and let trade flow between the tables. Set up a farm production cycle on one and factory on the other. Throw in corporate organization, trust funds, re-discounted paper, and so forth. Have a labor leader organize the workers and stage a strike. Get a lot of bank credit passed around and then make a run on the bank. Issue stock and watch it fluctuate in market price. Declare war and put industry on a war basis. Inflate the currency. Deflate it. Save your profits to expand your business. Cut prices to meet competition. Get squeezed on your lease. Start out from primitive barter, work up the present system with the dividend, the discount, and the National Account. Do all of those things, but be sure to observe the rule of duplicating the structure of the real world. It's fascinating and you will teach yourself more about money and economics than anyone else can possibly teach you. Bear in mind the fundamental theorem that we formulated about the necessity for new money for capital expansion. If you find any situation which appears to contradict it, or any of our other conclusions, go back and do it over, writing down each step in detail. If you don't find your error, give me a call. But I'm sure you will.*
[*Several typical problems have been worked out for the benefit of the reader and appear as an appendix at the end of the book. A typical modern cycle is given showing the dividend and discount in operation. Especially interesting are examples of twentieth century economics showing the ridiculous impasses into which our forefathers fell simply through failure to understand the nature of money. The Author]
X
Perry followed Master Davis' advice and spent several days making up problems to play out with his economic tin soldiers. He drafted Olga and Diana into the game, and they solemnly played through various combinations of financial and economic situations. At first the women played simply to be agreeable, but they became fascinated by the strange possibilities of early day finance. Olga developed remarkable skill in stock market and commodity manipulation, and amassed fabulous fortunes on paper. Diana protested this and maintained that it obviously would be illegal for anyone to do such wicked things with the necessities of life. References to history left her only partly convinced. Diana liked to run factories but was a failure as a banker, as she could not see any sense in interest and was reluctant to clamp down on a debtor. Both of them admitted that they had not understood the operations of finance and industry before, and had rather taken the economic regime for granted. Perry found himself in the pleasant position of being able to instruct natives of the new America in the workings of their own environment.
In due course he felt that he understood fully the workings of both economic systems, the old and the new, and felt capable of analyzing correctly any possible economic system. Nevertheless he found growing up inside a curious distaste for the modern system. He now understood the mechanics of it, true, and realized that its mathematical theory was correct, but notwithstanding it did not suit his taste. He decided to call Davis and discuss it with him.
After a decent interval of drink and smoke, Davis opened the conversation.
"What is it, my boy? Found a black swan?"
"Why a black swan?"
"That's the classic example of the fallaciousness of the deductive method. The syllogism ran 'All swans are white. This bird is a swan. Therefore this bird is white.' Along in the nineteenth century somebody found a black swan and the perfect syllogism was wrecked."
"No, I haven't found a black swan, but I do have a problem."
"I don't think you will find a black swan in the conclusions we have reached. You'll find many problems not covered by the Law of Capital Investment. But the law itself is simply a statement of the workings of an invented mathematical entity, money. Sometimes we get into dilemmas through a failure to distinguish between mathematical necessity and objective realism. Marx fell into that error and it vitiated his whole work. For example and in particular, his definition of value. Did you happen to notice that we spoke of cost in money and price in money and never once mentioned value?"
"Now that you speak of it, yes."
"Can you define value?"
"Well, perhaps not. I seem to know what it means."
"Marx defined it as a measure of the number of work-hours required to produce a given article. His definition was meaningless in the real world, and he ran into all sorts of difficulties, which he tried to avoid by patching the definition. But the definition was wrong and his beautiful, monumental, logical structure was invalid. He was important only as an agitator against social injustice and he contributed more error than truth to the art of economics. He made a similar mistake in assuming that a man lives in his belly rather than in his head. Animals do, but not men. They must serve their bellies, it is true, but aside from that, their motives may have nothing to do with economic considerations. Consequently Marx's Economic Determinism was not valid. But I've digressed again. Value in economics is a relationship between an individual and a thing or a service. It is a personal relationship which expresses how much a particular individual desires a thing or a service. Economic value of a thing or a service approximates the average of the summation of the personal values placed on the thing or service by the individuals who constitute the consuming public. Value plus purchasing power in the hands of the consuming public constitutes effective demand. Price is a function of supply and demand. Value may be expressed in dollars and cents through this complex functional relationship, but value is not price, and is not a measure of work-hours, it is a word used to express the desire of an individual to possess a thing or a service. I am not giving the word a new definition; I am simply stating explicitly the observed fact that such is what people mean when they speak of value. Sale takes place when the value to the prospective buyer is greater than the value to the owner. Note the difference between Marx's idea of value and that which I have expressed. Marx attempts to measure value by the amount of labor expended. Yet it is an obvious fact in the real world that an inefficient, careless, or unimaginative worker can slave for hours to produce an article practically worthless, that the public won't buy, valueless. An intelligent skillful inventive worker may turn out in a short time an article that the public will snap up at once at a high price. Which has the greater value?"